Oil hits fresh highs

World oil prices soared to fresh two-year highs yesterday as the United States and Britain pressed the case for war on Iraq, a major supplier to the West, while US inventories dwindled to 27-year lows.

Commercial crude oil stocks in the world's top consumer are now at their lowest level since 1975, when the West built reserves to avert future price shocks after the Arab oil embargo.

International benchmark Brent crude oil rose 66 cents to hit $33.11 a barrel, its highest level since November 2000.

US crude futures peaked at $36.35, their highest since October 2000 and marking a gain of 58 cents from Wednesday's close.

"Despite vociferous opposition from Germany and France, there seems to be little likelihood that the US drive towards war with Iraq will be blocked," said Lawrence Eagles of brokers GNI.

"The short-term supply situation is also of concern." Oil prices have spiked 45 per cent in the last three months on an explosive cocktail of a US troop build-up in the Middle East Gulf, a crippling strike in OPEC member Venezuela and Arctic weather in markets from Europe to the United States.

Robert Mabro, head of the Oxford Institute for Energy Studies, expects prices to peak around $40-$45 per barrel if and when war breaks out on the world's eighth largest oil exporter.

"While the hostilities are taking place, the world will be deprived of about two million barrels a day. Prices will inevitably rise," he said.

High oil prices act like a tax on the economy and dampen growth.

Some traders had been expecting Western governments to release oil from massive state-run stockpiles to ease the threat of supply shortages.

But the European Commission said yesterday it was confident producing countries could meet any shortfalls.

"The view of the Commission is that there is today no threat of disruption to supply and we are confident in the responsibility of producer countries," a spokesman said.

Any Iraqi halt would compound shortages caused by a two-month-old strike in Venezuela, the world's fifth largest exporter, which has crippled the oil industry there and slashed US imports at a time of peak winter fuel needs.

Crude oil stocks in the United States fell below 270 million barrels last week for the first time since October 1975, according to government data.

They are now below what authorities recommend as the minimum operating rates, equivalent to 14 days of U.S. oil consumption.

Oil prices are near their September 2000 peak when the Clinton administration ordered a release of reserves from strategic stocks.

The Bush administration has so far shied away from using the Strategic Petroleum Reserve (SPR), which contains 600 million barrels of crude.

"As soon as the U.S. administration decided that the Venezuelan strike would not be counted as a supply emergency or disruption sufficient to cause a release, the die was cast that SPR oil would not enter the market until a war against Iraq was in progress or absolutely imminent," said Paul Horsnell of investment bank J.P.Morgan.